The second stage in the washing cycle – Layering (Video)

Layering

Layering is the process of separating the proceeds of criminal activity from their origin through the use of many different techniques to layer the funds. These include using multiple banks and accounts, having professionals act as intermediaries and transacting through corporations and trusts, layers of complex financial transactions, such as converting cash into traveler’s checks, money orders, wire transfers, letters of credit, stocks, bonds, or purchasing valuable assets, such as art or jewelry. All these transactions are designed to disguise the audit trail and provide anonymity.

Layering usually involves a complex system of transactions designed to hide the source and ownership of the funds. Once cash has been successfully placed into the financial system, launderers can engage in an infinite number of complex transactions and transfers designed to disguise the audit trail and thus the source of the property and provide anonymity. One of the primary objectives of the layering stage is to confuse any criminal investigation and place as much distance as possible between the source of the ill-gotten gains and their present status and appearance

Typically, layers are created by moving monies in and out of the offshore bank accounts of bearer share shell companies through electronic funds’ transfer (EFT). Given that there are over 500,000 wire transfers – representing in excess of $1 trillion – electronically circling the globe daily, most of which is legitimate, there isn’t enough information disclosed on any single wire transfer to know how clean or dirty the money is, therefore providing an excellent way for launderers to move their dirty money. Other forms used by launderers are complex dealings with stock, commodity and futures brokers. Given the sheer volume of daily transactions, and the high degree of anonymity available, the chances of transactions being traced is insignificant.

Layering methods

The main methods of layering are:

Electronic funds transfers

Monetary instruments

Loan Back

Tax Havens and Offshore Banks

Shell corporations

Trusts

Walking accounts

Intermediaries.

Electronic Funds transfers:Also referred to as a telegraphic transfer or wire transfer. Dirty money, once placed in the system, is often transferred by electronic fund transfer (wire transfers) between accounts or between banks, whether domestic or offshore. Launderers might accumulate a number of small deposits in an account(s) and use a domestic electronic fund transfer to consolidate these accounts, followed by an international electronic fund transfer to move the monies offshore. This type of electronic money transfer can be carried out quickly and over vast distances, involving a number of offshore jurisdictions. Funds moved in this fashion, often in purported payment for goods sold or services rendered (that do not in reality exist), on a number of occasions, ultimately become practically untraceable

Monetary instruments:Once placed in the banking system, dirty money can be used to buy cashier cheques, drafts, travellers cheques, letters of credit etc. These instruments may then be transported and transferred, either domestically or, more usually, offshore. Funds are first placed in the financial system onshore and are then moved offshore where the layering takes place. Once offshore the funds are often transferred between accounts held by front companies incorporated in offshore centers, where confidentiality provisions allow corporate service providers to act as nominees and/or for bearer shares to be issued in order to maintain anonymity in the outside world.

Loan Back: Using this method, a criminal provides an associate with a sum of illegitimate money and the associate creates the paperwork for a loan or mortgage back to the criminal for the same amount, including all of the necessary documentation. This creates an illusion that the criminal’s funds are legitimate. The scheme’s legitimacy is further reinforced through regularly scheduled loan payments made by the criminal, and providing another means to transfer money.

Tax Havens and Offshore Banks

Launderers tend to move their activity to jurisdictions where there are weak money-laundering countermeasures. A main resource in money-laundering are the financial havens and offshore centers.

Offshore banks are banks anywhere in the world that allow the establishment of accounts from non-resident individuals and corporations. A number of countries have well developed offshore banking sectors. In some cases, these banking sectors follow loose anti-money laundering regulations.

Offshore banks are popular mean for money launderers for layering funds, tax evaders and corrupt officials. Money launderers also like to keep funds in offshore banks because their fixed term deposit accounts provide interest income.

Some offshore centres combine loose anti-money laundering procedures with strict bank secrecy rules. Criminals can easily maintain and transfer funds from banks in these centres because details of client activities are generally denied to third parties, including most law enforcement agencies.

Offshore banking centres are home to more than $5,000 billion in assets, $1,000 billion in bank deposits and $4,000 billion held in the form of stock, bonds, real estate and commodities.

The Cayman Islands, for example, one of the most important offshore jurisdictions, is estimated to be the fifth largest financial centre in the world behind London, New York, Tokyo and Hong Kong. There are over 570 banks licensed there, with deposits of over $500 billion.

Tax heavens freely offer low or non-existent tax rates that are attractive to investors, company owners and ordinary citizens anxious to reduce their tax burdens for they do not regard tax evasion in another country as a crime. These havens also offer tools, available only to non-residents and only to be used offshore, which are designed to defeat the laws of other countries.

A brief description of the process is as follows:

Bank X in Country A allows for the establishment of accounts from non-residents. Mr. Y, a non-resident of the Country A, has numerous accounts with Bank X in the names of different companies and individuals. Mr. Y is a resident of the Country B.

Funds from illegal activities in Country B are placed into Mr. Y’s accounts with Bank X using different placement techniques.

Once the funds are placed, Mr. Y instructs Bank X to make various transfers and payments, thereby distancing the funds from their origins.

Shell corporations

A shell corporation is a company that is formally established under applicable corporate laws but does not actually conduct a business. Instead, it is used to engage in fictitious transactions or hold accounts and assets to disguise the actual ownership of these accounts and assets.

Sophisticated money launderers use shell corporations in different countries. To increase the appearance of legitimacy it is preferable that these companies already have a history of actual activity. Once the corporation is set up, a bank deposit is then made in the haven country in the name of that offshore company.

In many countries (particularly offshore banking centres), the reporting and record-keeping requirements for corporations are quite minimal, which makes it easy to disguise ownership of the corporation.

The main reason for businesses to be registered in offshore havens is to escape the severe tax and registration regulations on domestic companies. They can funnel large amounts of capital to and from offshore countries without the need to declare the transactions to domestic fiscal authorities.

On the condition that it do no business where it is set up, having an international business (IBC) or “offshore” corporation enables its owners to act with complete anonymity and not pay taxes.

In many jurisdictions it is not even required to keep corporate books or records and thus is perfect for concealing the origin and destination of goods in international commerce. Also ownership in corporations can be represented by ‘bearer shares’. In these corporations, the holder of the bearer share certificate is regarded as the owner of the shares. This makes it easy to disguise and transfer ownership.

A brief description of the process is as follows:

Mr. Y sets up Company A under the laws of the Country X.

Company A opens bank accounts with various banks.

Smurfs working for Mr. Y transfer illegal funds to the Company A accounts.

Company A transfers these funds to other accounts or invests them in securities.

Trusts

Trusts are legal arrangements for holding funds or assets for a specified purpose. These funds or assets are managed by a trustee for the benefit of a specified beneficiary or beneficiaries.

Trusts can act as layering tools because they enable the creation of false paper trails and transactions. Trusts are principally governed by a deed of trust drawn up by the person who establishes the trust. Trusts are more complex to use than corporations, but they are less regulated.

The private nature of trusts makes them attractive to money launderers. Secrecy and anonymity rules help conceal the identity of the true owner or beneficiary of trust assets. Also, the presence of a corporate trustee provides an appearance of legitimacy.

In addition, offshore trusts may contain a ‘flee clause’. This clause allows the trustee to shift the controlling jurisdiction of the trust if it is in danger because of war, civil unrest or, more likely, the activities of law enforcement officers or litigious investors and consumers.

Typically, trusts are used in combination with corporations in money laundering schemes. Trusts are used less frequently than corporations because of their complexity and their disuse in business transactions.

A brief description of the process is as follows:

Mr. Y establishes a business trust by appointing a corporate trustee and drawing a deed of trust, which names Company A as a beneficiary.

Mr. Y transfers funds to the corporate trustee and under the deed of trust, Company A is empowered to directly use and invest the funds.

Walking accounts

A walking account is an account for which the account holder has provided standing instructions that all funds be transferred immediately on receipt to one or more other accounts. By setting up a series of walking accounts, criminals can automatically create several layers as soon as any funds transfer occurs.

Money launderers use this layering technique because it is extremely difficult to detect and money moves very fast through accounts across the world. Due to these reasons, walking accounts create substantial investigation hurdles for regulators.

The term ‘walking account’ was coined because the money in these accounts appears to ‘walk away’.

A brief description of the process is as follows:

Using shell corporations, Mr. Y sets up three accounts with three different banks. He provides instructions to transfer all funds immediately on receipt to one or more of the other accounts.

Smurfs deposit cash into the first account. Without the need for further action, the funds are ‘layered’ by being transferred to the third account.

Intermediaries

Money launderers frequently use Lawyers, accountants, financial advisers and other professionals as intermediaries between the illegal funds and the criminal. Professionals engage in transactions on behalf of a criminal client who remains anonymous. These transactions may include the use of shell corporations, fictitious records and complex paper trails.

Money launderers like to use intermediaries because they lend credibility and decrease suspicion. In addition, these professionals generally have confidentiality obligations to their clients so the risk of money launderers getting caught is low.

Many countries have realised that criminals are increasingly using non-financial professionals as intermediaries. To counter these activities, many countries have included non-financial professionals in new anti-money laundering legislation.

A brief description of the process is as follows:

Mr. Y transfers funds to a special account for client funds maintained by the law firm A.

Law firm A establishes a shell corporation, Company X which opens various bank accounts. Law firm A now transfers Mr. Y’s funds into these accounts.

Signs of Layering

The very nature of layering makes it possible to identify certain traits that can indicate that money laundering is taking place:

Financial transactions that do not make sense – and appear to be done just for the sake of the transaction with no underlying reason;

Frequent sales and purchases of investments – particularly where fees and commissions are taken by professional advisors;

Numerous account balances being consolidated in a far smaller number of accounts – particularly where the original series of accounts are apparently unconnected;

Lack of concern over losses on investments, bank charges or professional advisor charges. The money laundering is only interested in profit as a second issue – the sole motive is to obscure the origins of the fund.

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